February 28, 2009

It's ironic that Obama gets elected with big plans to soak the rich at the very moment that the rich are suddenly much less soakable, but it's not really a random fluke. After all, if the markets hadn't collapsed, the margin would have been much closer, and Obama might even have lost.

In theory, it makes sense to squeeze the rich when the rich are riding high, and coddle them when they are down, but that's hard for human beings to do. We root for winners and despise losers, so we usually spoil businessmen and financiers when they are going great guns and smack them around after they stumble. (See "1920s-1930s, History of").

The success of Reagan's 1981 tax cuts stemmed from reversing the usual timing and giving the business class a boost when they were down and feeling unloved and unmotivated. But that's rare.

February 27, 2009

Obama's economic thinking remains stuck in 2007. He assumes he can turn American into a social democratic state by taxing the top two percent, by closing loopholes on hedgefund managers, and the like.

Yet, the problem of the rich getting richer largely solved itself in a few days in early autumn of 2008. I suspect that hedge fund managers won't be a bottomless source of taxable income in 2009, and for a number of years to come.

So, Obama will eventually realize that he'll have to squeeze the upper middle class: families making from, say, $90,000 to $250,000. He'll have to raise income tax marginal rates on this broad expanse.

But a lot of Obama voters fall in this range. Moreover, in the Blue States, $90,000 to $250,000 isn't necessarily a huge amount of money. A family of four making $150,000 in Tulsa is probably living well, while one in Manhattan is not.

So, I predict that eventually, Obama will be tempted to try to adjust the tax code for the local cost of living: impose higher tax rates on the Oklahoma family making $150k than on the New York family making the same income.

With everybody looking to cut down on expenses, I'm passing along a way that some Californian families could save a fortune on higher education. My wife heard this from a young Armenian-American lady. Armenians tend to to be high IQ but not as marinated in the Stuff White People Like verities as other high IQ groups, so they can bring a fresh perspective to working the status game.

This young woman dropped out of a private high school after tenth grade, took and passed the GED, and then enrolled at the local community college. Community Colleges tend to have a mediocre but decent learning environment because the students there want to be there. If they don't want to be there, they stop coming to class, so JuCos are not like high school where kids who don't want to be in high school disrupt classes.

She got her Associates of Arts degree by age 18, and then transferred to UCLA. (Although UCLA is very hard to get into as a freshman, it takes about 3000 to 4000 transfers per year, typically from California's community colleges. In fact, she was probably more likely to get into UCLA as a junior than as a freshman.) She was on track to get her prestigious UCLA degree at age 20, and then get a job.

So, she saved the last two years of Catholic high school tuition at say, $10k per year. JuCo tuition is minimal and she lived at home. Tuition and room and board at UCLA will probably cost her affluent parents $20k per year over two years. She can probably get a job paying $30k at age 20. Net cost at age 22 (including the $60k earned working) versus four years of private high school and four years of UCLA: zero for this route versus $100k for the traditional route.

In his speech to Congress and the nation Tuesday night, President Barack Obama set a bold goal of retaking America’s global leadership in the number of college graduates by 2020. ...

For many Americans, it may come as a surprise that their country is no longer number one in the world in college attainment, with over 14 million undergraduates enrolled in higher education institutions in 2008 alone. But just because students enroll in college doesn’t necessarily mean they finish and attain a degree.

Some insight into this puzzle can be provided by digging a bit deeper into the president’s startling statistic that only 50 percent of undergraduates actually finish their degrees. While the proportion of individuals enrolled in college in the United States has grown since the 1970s, the proportion of students receiving diplomas has declined during the same period. Currently less than 60 percent of students entering four-year institutions earn a bachelor’s degree, and barely one-fourth of community college students complete any degree within six years. As a result, the United States now ranks 10th in college attainment for its 25- to 34-year-old population, down from third in 1991, according to the Organization of Economic Cooperation and Development.

Well, it's not really a puzzle why this is happening, although Barack Obama will never, ever tell you it.

But, here’s a reform for making some degree of “college attainment” more feasible, one that I’ve never seen suggested before:

Why shouldn’t four year colleges give out two year Associates of Arts degrees?

For example, say you graduate from a Los Angeles public high school with a C+ GPA, and you average 450 on the SAT test. You could go to LA Valley Community College and get an AA degree after two years and then, if you are so inclined, transfer to a four year institution to pursue a bachelor's. But everybody tells you that a four-year college is much more prestigious, so you decide to enroll at Cal State Northridge. Over the next six years, you finish three years worth of classes, but you are really stumped by a couple of required classes that you’ve failed twice, and now you are 24 and your girlfriend is pregnant and wants you to work full time, and so you drop out.

And thus you will go through life as a mere high school graduate, whereas if you had gone to community college out of high school instead of to a fancier Cal State, you’d at least have an AA degree to your name.

So, why not have four year colleges award AA degrees as well as BA degrees? Why shouldn't this guy have an AA degree from Cal State Northridge?

Similarly, as I've proposed before, high schools could award Associate high school degrees to those who complete the requirements through tenth grade, which would give the low end kids a plausible goal to keep them motivated into sticking with school through tenth grade, and provide future employers with a way to distinguish the dumb but okay kids from the real losers.

February 26, 2009

Casey Martin, who was born with a terrible birth defect that crippled one of his legs, leaving him in recurrent pain, starred on Stanford's famous 1995 college golf team along with the full-blooded Navajo Notah Begay, who went on to win four times on the PGA tour before alcohol brought him down, and with Eldrick Woods Jr., who, last time I heard, remains employed in a golfing capacity.

Despite his disability, Martin enjoyed enough success on the minor league Nike tour to qualify for the PGA tour in 2000. His lawsuit under the Americans with Disability Act to be allowed to use a golf cart on the PGA tour went all the way to the Supreme Court, where he won in 2001.

Martin's was not a popular victory with players, with both Jack Nicklaus and Arnold Palmer protesting that it would open the door to other players getting a note from their doctor to be chauffeured about the course.

It was easy to imagine a player with a bad back like Fred Couples trying to get permission for a cart, and then the whole thing descending into carts everywhere.

And yet, eight years later, the PGA Tour hasn't slid down the slippery slope. So far, as far as I can tell, a cart has only been used once by somebody other than the severely unlucky Martin: Erik Compton rode in one tournament last fall because he had gotten his second heart transplant only a few months before.

Essentially, golf has a fairly healthy culture of sportsmanship where top players don't want to be seen as abusing loopholes. So, it hasn't been hard so far to restrict cart-riding to rare human-interest stories like Martin and Compton.

In the early 1970s, the Wall Street credit-rating companies (S&P, Moody's, Fitch) switched over from charging bond-buyers for rating to charging bond-issuers. In the mid-1970s, the government started writing regulations requiring certain levels of ratings from the big three ratings firms: in effective, establishing a legal cartel.

Anybody with a suspicious mind can guess what happened next: right down the slippery slope. The ratings firms succumbed to this conflict of interest and exploited their protected position to get rich by rating crud as gold.

Except, that didn't happen right away. The slope wasn't all that slippery. Apparently, the culture was sound enough that it took a couple of decades for the ratings firms to fall prey to the incentives.

Unfortunately, by then, everybody had forgotten that the credit ratings firms have a huge conflict off interest. They'd had that obvious conflict of interest for so long that people had stopped worrying about it. When I Google for it, I can't find an article talking about their "conflict of interest" before May 2007. A 2006 reference book entitled the Euromoney Encyclopedia of Debt Finance blandly asserts:

Although there would appear to be a conflict of interest as a result of providing a supposedly independent rating in exchange for a fee, this risk is fully mitigated by the market discipline imposed by the need for investor acceptance of the ratings.

Or, perhaps more accurately, the conflict of interest won't be a problem until it starts being a problem.

The budget that President Obama proposed on Thursday is nothing less than an attempt to end a three-decade era of economic policy dominated by the ideas of Ronald Reagan and his supporters.

The Obama budget — a bold, even radical departure from recent history, wrapped in bureaucratic formality and statistical tables — would sharply raise taxes on the rich, beyond where Bill Clinton had raised them. It would reduce taxes for everyone else, to a lower point than they were under either Mr. Clinton or George W. Bush. And it would lay the groundwork for sweeping changes in health care and education, among other areas.

More than anything else, the proposals seek to reverse the rapid increase in economic inequality over the last 30 years.

Moreover, Obama's budget, we are informed, will also the problem of increasing carbon emissions.

And, guess what? I bet that in 2009 the rich will be less rich than in 2007 and less carbon will be emitted.

February 25, 2009

On this question of whether there's really a credit crunch, Robert Samuelson writes:

"So, we've gone from too much credit to too little. Contrary to popular wisdom, banks -- institutions that take deposits -- aren't the main problem. In December, total U.S. bank credit stood at $9.95 trillion, up 8 percent from a year earlier, reports the Federal Reserve. Business, consumer and real estate loans all increased. True, lending was down 4.7 percent from the monthly peak in October. But considering there's a recession, when people borrow less and banks toughen lending standards, the drop hasn't been disastrous.

The real collapse has occurred in securities markets. Since the 1980s, many debts (mortgages, credit card debts) have been "securitized" into bonds and sold to investors -- pension funds, mutual funds, banks and others. Here, credit flows have vaporized, reports Thomson Financial. In 2007, securitized auto loans totaled $73 billion; in 2008, they were $36 billion. In 2007, securitized commercial mortgages for office buildings and other projects totaled $246 billion; in 2008, $16 billion. These declines were typical.

Given the previous lax mortgage lending, some retrenchment was inevitable. But what started as a reasonable reaction to the housing bubble has become a broad rejection of securitized lending. Terrified creditors prefer to buy "safe" U.S. Treasury securities. The low rates on Treasuries (0.5 percent on one-year bills) measure this risk aversion.

Somehow, the void left by shrinking securitization must be filled. There are three possibilities: (a) securitization revives spontaneously -- investors again buy bonds backed by mortgages and other loans; (b) commercial banks or other financial institutions replace securitization by expanding their lending; or (c) the government substitutes its lending for private lending. Until now, it's been mostly (c). "

So, nobody is buying securitized assets anymore. Which is hardly surprising for two reasons:

1. American needs to pay off some debts, so we're buying fewer cars, etc.

As the malaprop-prone brother-in-law (or, perhaps, the unnamed narrator) in my recent short story about the Housing Bubble in Southern California pointed out:

"In fact, I think I'm going to pick up one of these babies, too, and sell it in six months. We'll be neighbors! Sort of. The mortgage company get a little snottier about down payments and interest rates when you tell them it's an investment, so I'll just check the "owner occupied" box. The broker doesn't care. He gets his commission, then Countrywise bundles it up with a thousand other mortgages and sells it to Lemon Brothers. The Wall Street rocket scientists call this "secretization" because nobody can figure out what anything’s worth. It's a secret.

"Lemon sells shares in the package all around the world. The Sultan of Brunhilde ends up owning a tenth of your mortgage. Do you think the Sultan's going to drive around Antelope Valley knocking on doors to see if you're really living there?"

The geniuses on Wall Street have finally figured out that they can't use the Laws of Probability to convert a big pile of absurd IOUs into AAA securities. Worse, securitization means they can't figure out how bad it is.

So, the question is whether the entire process of securitization is salvageable? Would increased transparency help? Wired has an article by Daniel Roth called "Road Map for Financial Recovery Radical Transparency Now!" about XBRL, a standardized set of tags to make financial documents easily comparable. I don't know if this particular idea would work for securitized assets, but it doesn't sound impossible to develop standards that would get the job done.

I worked for many years for marketing research firms that used the huge amount of data from scanned bar codes on supermarket products. The UPC code was developed by a private industry cooperative initiative in the 1970s and has proved such a huge success that it long ago became a seamless part of life.

President Obama announced that the economy is hurting because of a credit crunch. But my teenage son, who recently got his first credit card, is still getting a couple of offers per week for a second credit card.

Perhaps he's the only one in the country. If so I really don't think he's going to be able to pull the economy out of the doldrums singlehandedly because most of his credit card bill line items look like this:

Burrito Barn $3.49In-N-Out Burger $2.99

I think we need an economic strategy that goes beyond my son saying, "Why, yes, I will have fries with that."

Li has an actuarial degree (among others), and that appears to have been his downfall: he assumed mortgage defaults were like Time to Death to a life insurance actuary: largely random events that could be modeled.

Steve Hsu's website Information Processing has a 2005 WSJ article on Li's Gaussian Cupola, for looking at events that are mostly independent but have a modest degree of correlation:

In 1997, nobody knew how to calculate default correlations with any precision. Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities.

"Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."

Uh, maybe, maybe not. There just isn't much in the field of life insurance where selling more life insurance increases the risk of death. The life insurance companies figured out the basics of moral hazard a long time ago: don't let people take out insurance policies on their business rivals or their ex-wives to whom they owe alimony. No tontines. Don't pay out on new policies who die by suicide.

In contrast, giving somebody a bigger mortgage directly raises the chance of default because they need more money to pay it back. Giving them a bigger mortgage because you are requiring a smaller down payment, in particular, raises the risk of default.

His colleagues' work gave him the idea of using copulas: mathematical functions the colleagues had begun applying to actuarial science. Copulas help predict the likelihood of various events occurring when those events depend to some extent on one another. Among the best copulas for bond pools turned out to be one named after Carl Friedrich Gauss, a 19th-century German statistician [among much else].

The Gaussian distribution (a.k.a., normal distribution or bell curve) works like this: Flip a coin ten times. How many heads did you get? Four. Write it down and do it again. Seven. Do it again. Five. As you keep repeating this flip-a-coin-ten-times experiment, the plot of the number of heads you get each time will slowly turn into a bell curve with a mean/median of five.

But the Housing Bubble didn't consist of fairly random events that everybody was trying pretty hard to avoid, like with life insurance. Instead, human beings were responding to incentives. The closest actuarial analogy might be the big insurance payouts that fire insurance companies got stuck with in the South Bronx in the 1970s when decayed businesses that were now worth less than their fire insurance payouts developed a statistically implausible tendency to burst into flames in the middle of the night.

Human life really isn't all that random. That's because human beings respond to incentives. If you treat human beings as if they are just mindless probabilistic events, whose risks you can diversify away by dealing with large numbers of them at a time, they will outsmart you. They will put down inflated incomes on their mortgage applications. They will claim to be owner-occupiers when they are just speculators who will rent out the property to Section 8 tenants when they get into a cash flow bind. They will bribe appraisers to report a higher than actual value.

Life insurance companies are in the selection business, not the influence business. Watching other people get rich buying and selling houses, however, influences behavior.

The life insurance actuarial model fails as an analogy for mortgages on other dimensions as well. For example, people die from a very large number of causes, making the distribution of deaths over time more Gaussian. Mortgages, in contrast, are more like being in the earthquake insurance business in California.

Further, Jim Morrison pointed out, the thing about life is that nobody gets out alive. In contrast, lots of people can imagine themselves selling the three houses in Temecula right at the top of the market and retiring to Dallas in comfort.

And there's a tournament aspect to competitive fields, such as homebuying. If you're in the Olympic boxing tournament and you get away with a few defensive lapses in your opening round match against a pudgy guy from Bhutan doesn't mean you can likely get away with them in the gold medal round against the Cuban. Similarly, when the median home price in California gets to $500k, it's not the same as when it was $200k. You can't use default data from when homes cost 40% as much. The margin for error has vanished.

Finally, the idea that just because there hadn't been a giant housing crash since WWII means there can't possibly be a giant housing crash is about 180 degrees backward. It's where there hasn't been a crash lately that you have to worry. What, did everybody expect the government to discourage home buying?

February 23, 2009

We’ve all read about all the hundreds of billions of dollars lost by lenders and investors on mortgages made during the housing bubble that should never have been written in the first place due to low rent lying: Mortgage brokers telling buyers to make up jobs, income, spouses, and forget about other houses they own, previous bankruptcies, and the like. Appraisers adding 30% to values. Buyers claiming spouses they weren't married to, etc. etc.

I got to thinking: “If Procter & Gamble were in the mortgage industry, would they let themselves be taken to the cleaners by countless cases of petty fraud, the way Lehman Bros. and Washington Mutual and Fannie Mae and so many others did?”

No way.

If P&G were in the business of giving out a hundred billion in mortgages or buying hundreds of billions of other people’s mortgages, they would hire market research firms to monitor trends in the mortgage marketplace. They’d pay survey research firms to call up recent homebuyers to see how onerous their payments were turning out to be. They’d hire focus groups firms to talk to buyers and realtors and mortgage brokers to spill the beans about their business. They’d hire "mystery shopper" firms to pretend to be in the market for houses and see if any of the professionals were pulling any funny stuff. They’d have appraisers on their own payroll who were paid the same no matter how low they appraised the houses.

Procter & Gamble would spend the money to monitor the trillion dollar mortgage business as closely as they monitor the billion dollar toothpaste business.

But I’ve never heard of anybody being paid to monitor the mortgage market for monkey business. Have you?

By the way, if you think there might be a business opportunity here, go for it. Of course, even better, figure out what’s going to be the next Bubble after mortgages (alternative energy?) and set up systems that can help investors not be such damn fools in the future.

UPDATE: On second thought, the financial industry would just use marketing research reports on growing irrationality and funny business in the market to jump into the next big bubble even sooner and harder. Oh, well ...

The next Census is a year away, and then legislative districts will be redrawn to reflect the new population. A crucial C0nstitutional issue is whether resident non-citizens, including illegal immigrants, should be counted in determining representation.

Some interesting data on rotten boroughs from Craig Russell:

1) In the last election, an average of 301,200 presidential votes* were cast per US House District.

2) In California, the US state with the highest number of immigrants, only 255,900 votes were cast per district.

3) The 22 House members of the Congressional Hispanic Caucus averaged only 161,500 votes cast in their districts…

5) Of the 10 highest immigration states (by percent), 8 voted for Obama; of the 10 lowest, 9 voted for McCain.

We are told by Obama & Co. how crucial sampling is because an “actual enumeration” (the Constitution’s exact words) would unfairly exclude immigrants. Based on this data they’re already being overrepresented. Is it fair to give a dozen or more House seats (and electoral college votes) to people who aren’t even in this country legally, or who aren’t citizens?

In most states, illegal immigrants are counted in allotting legislative districts, but the highest court to consider the issue said that's wrong:

In the majority opinion of the 1998 7th Circuit federal case "Barnett vs. City of Chicago," Judge Richard J. Posner ruled, "We think that citizen voting-age population is the basis for determining equality of voting power that best comports with the policy of the (Voting Rights) statute. ... The dignity and very concept of citizenship are diluted if non-citizens are allowed to vote either directly or by the conferral of additional voting power on citizens believed to have a community of interest with the non-citizens."

That decision applies only to three Midwestern states, however. The Supreme Court has yet to rule definitively on the issue.

It would seem like if the GOP wanted to bring it up, they'd better do it now.

February 22, 2009

My new VDARE.com column explains what former Republican Senator Phil Gramm is talking about in last Friday's Wall Street Journal, when he says it wasn't his financial reforms that caused the crash: it was loose money and politicized mortgages:

If you aren’t a regular reader of VDARE.com, you’d need a secret decoder ring to understand what Gramm means by “politicized mortgages”. The closest he manages to come to explaining what he’s talking about in his Wall Street Journal op-ed is his euphemistic reference to Fannie Mae and Freddie Mac’s 35 percent quota that “targeted geographic areas deemed to be underserved”.

You know and I know that “underserved” is Diversity Speak for black and Hispanic neighborhoods. Yet Gramm still can’t come out and say it in public. (In his oral presentation at AEI, he had used the somewhat more revealing term “inner cities and depressed areas”. But he didn’t dare be even that clear in the WSJ, or maybe the editors wouldn’t let him)

Moreover, that raises a fundamental question: How can Respectable Republicans like Gramm ever hope to persuade the public when they are terrified of saying what they mean for fear of being branded a “racist”?

I guess Gramm would prefer to go down in history as the man who blew up the world than to be accused by the SPLC of uttering hatefacts.

For example, it would strengthen Gramm’s case to point out that Crash was kicked off not just by a subprime lending crisis, but one concentrated in merely four states: California, Arizona, Nevada, and Florida. In August 2008, these accounted for 50 percent of all foreclosures and the vast majority of defaulted dollars.

But if Gramm were to mention that, it would also raise the unmentionable specter of Demographic Change.

There was overlending going on all over the world—yet the collapse started in a few rapidly Hispanicizing states in the U.S. Why?

You have to look at both sides of the equation: lending and repayment. In California and Company, not only was too much money being lent relative to past rates (which was happening in lots of other places, too), but, also, the earning capacity of the new homebuyers to pay back their loans was declining—as Americans moved out and Latin Americans moved in.

That double whammy in the Sand States of increasing lending and decreasing human capital is, more than anything else, what blew the gasket on the world economy.

Of course, we also needed a third element—political correctness—to keep investors from noticing what was happening.

And that, judging from Gramm’s timidity, appears to be as strong as ever.

More, including the inside story on how Angelo Mozilo's Countrywide Financial got away with it, here.

Watching "The Curious Case of Benjamin Button" is like listening to a Barack Obama speech. It's obviously something of a higher quality than the norm, and it induces a not-unpleasant trance-like state as it goes on and on, but it's hard to remember what the point was.

Here's the Google Wallet FAQ. From it: "You will need to have (or sign up for) Google Wallet to send or receive money. If you have ever purchased anything on Google Play, then you most likely already have a Google Wallet. If you do not yet have a Google Wallet, don’t worry, the process is simple: go to wallet.google.com and follow the steps." You probably already have a Google ID and password, which Google Wallet uses, so signing up Wallet is pretty painless.

You can put money into your Google Wallet Balance from your bank account and send it with no service fee.

Google Wallet works from both a website and a smartphone app (Android and iPhone -- the Google Wallet app is currently available only in the U.S., but the Google Wallet website can be used in 160 countries).

Or, once you sign up with Google Wallet, you can simply send money via credit card, bank transfer, or Wallet Balance as an attachment from Google's free Gmail email service. Here'show to do it.

(Non-tax deductible.)

Fourth: if you have a Wells Fargo bank account, you can transfer money to me (with no fees) via Wells Fargo SurePay. Just tell WF SurePay to send the money to my ancient AOL email address steveslrATaol.com -- replace the AT with the usual @). (Non-tax deductible.)

Fifth: if you have a Chase bank account (or, theoretically,other bank accounts), you can transfer money to me (with no fees) via Chase QuickPay (FAQ). Just tell Chase QuickPay to send the money to my ancient AOL email address (steveslrATaol.com -- replace the AT with the usual @). If Chase asks for the name on my account, it's Steven Sailer with an n at the end of Steven. (Non-tax deductible.)

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